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I would be interested to see a study of how buying puts on a small percent of your portfolio over time fares over just a 100% index strategy. I have to imagine

I would be interested to see a study of how buying puts on a small percent of your portfolio over time fares over just a 100% index strategy. I have to imagine that the no-insurance strategy fares better over long periods of time since you’re taking on greater risk. With puts you’re just offloading your tail risk onto someone else willing to take it on. If that were not true it would mean puts are chronically underpriced. For the average investor with a long investing horizon it does not make sense to reduce your gain just to smooth out your equity curve. But if you are a few years away from retirement, for example, then maybe it makes sense as an alternative to just scaling back on risky assets.

looping__lui 7y ago
Unless you are an institutional investor, Puts are just expensive to have... Imagine you invest 3% of your portfolio in Puts, that money will be lost (probably cutting your 6% S&P500 return in half) only to give you a 500% / 1000% return on those 3%. There generally is a huge Spread (e.g., 10/30/50%) so you are already down the moment you buy the Puts. The spread increases for “black swans” far out of the money events - so people are pricing the possibility of a crash into the Puts... I doubt that a lot of people actually make money w/ Puts... You would have lost your money most of the time for the past 15 yrs or so... May come out “even” if you get “lucky” and the market folds twice in between. The only exception might be individual titles you believe are overpriced (e.g., 950 USD TSLA...). Instead of buying Puts prior to retirement, just reduce the exposure. Btw, that is always true: Puts on stock index essentially have the same effect as lowering your equity invest (but you safe money). Personally I doubt the Joe Doe investor will make any money w/ Puts on indices.
- chillacy 7y ago
  I assume that there was a tax advantage at least: hedging (with puts or otherwise) lets you hold your stocks for longer.
  - looping__lui 7y ago
    How is that a tax advantage? If I am not mistaken unless you hold your stocks/ETFs shorter than a year the taxation stays the same. What is the math behind that? I’m really curious because a 10-50% spread on Put options just makes them pretty unattractive imho and more a “gamble” than a real option (pun intended)
    - chillacy 6y ago
      Yea as you pointed out the long term capital gains is one area where you might have a tax advantage hedging. Imagine you bought a bunch of stock 11 months ago and you want to capture profits right now, it may be cheaper to buy puts out for 1 month and then sell for as long term capital gains. Puts are of course only one way to hedge, some people hold cash, buy gold/bonds/natural resources, buy VXX, etc. Also the spread varies a lot, options on SPY tend to have tighter spreads than on a random stock, but I've found that submitting a "reasonable" offer (in the middle of the buy/ask prices, in-line with the black-scholes estimate) usually gets filled within the day. Just buying a put without owning the underlying is definitely a risky gamble. But if you own 100 shares of the underlying it becomes a hedge since it limits your downside (at the cost of upside). And if you buy the put and sell a call you can limit any gains and losses to within a narrow band: https://www.investopedia.com/terms/c/collar.asp https://www.investopedia.com/terms/c/collar.asp
- jliptzin 7y ago
  I agree with you 100%
lmohseni 7y ago
You can invest in a put index, for example: http://www.cboe.com/delayedquote/advanced-charts?ticker=^PUT http://www.cboe.com/delayedquote/advanced-charts?ticker=^PUT

looping__lui 7y ago

Unless you are an institutional investor, Puts are just expensive to have... Imagine you invest 3% of your portfolio in Puts, that money will be lost (probably cutting your 6% S&P500 return in half) only to give you a 500% / 1000% return on those 3%. There generally is a huge Spread (e.g., 10/30/50%) so you are already down the moment you buy the Puts. The spread increases for “black swans” far out of the money events - so people are pricing the possibility of a crash into the Puts... I doubt that a lot of people actually make money w/ Puts... You would have lost your money most of the time for the past 15 yrs or so... May come out “even” if you get “lucky” and the market folds twice in between. The only exception might be individual titles you believe are overpriced (e.g., 950 USD TSLA...). Instead of buying Puts prior to retirement, just reduce the exposure. Btw, that is always true: Puts on stock index essentially have the same effect as lowering your equity invest (but you safe money). Personally I doubt the Joe Doe investor will make any money w/ Puts on indices.

chillacy 7y ago
I assume that there was a tax advantage at least: hedging (with puts or otherwise) lets you hold your stocks for longer.
- looping__lui 7y ago
  How is that a tax advantage? If I am not mistaken unless you hold your stocks/ETFs shorter than a year the taxation stays the same. What is the math behind that? I’m really curious because a 10-50% spread on Put options just makes them pretty unattractive imho and more a “gamble” than a real option (pun intended)
  - chillacy 6y ago
    Yea as you pointed out the long term capital gains is one area where you might have a tax advantage hedging. Imagine you bought a bunch of stock 11 months ago and you want to capture profits right now, it may be cheaper to buy puts out for 1 month and then sell for as long term capital gains. Puts are of course only one way to hedge, some people hold cash, buy gold/bonds/natural resources, buy VXX, etc. Also the spread varies a lot, options on SPY tend to have tighter spreads than on a random stock, but I've found that submitting a "reasonable" offer (in the middle of the buy/ask prices, in-line with the black-scholes estimate) usually gets filled within the day. Just buying a put without owning the underlying is definitely a risky gamble. But if you own 100 shares of the underlying it becomes a hedge since it limits your downside (at the cost of upside). And if you buy the put and sell a call you can limit any gains and losses to within a narrow band: https://www.investopedia.com/terms/c/collar.asp https://www.investopedia.com/terms/c/collar.asp
jliptzin 7y ago
I agree with you 100%

lmohseni 7y ago

You can invest in a put index, for example: http://www.cboe.com/delayedquote/advanced-charts?ticker=^PUT http://www.cboe.com/delayedquote/advanced-charts?ticker=^PUT